• Cut our FV to SAR10.5/share and downgrade to Sell We cut our FV by 4% to SAR10.5/share as we incorporate lower contract awards (-17% vs previous forecast for 2016-19e), lower revenue assumptions, with 2015-19e CAGR of -5.7%, further pressure on profitability, with gross profit margins averaging 7.2% (vs 2012-15 average of 10.9%, 7.4% in our previous numbers) and lower other operating income. We downgrade our rating to Sell on 15% downside potential. The stock has rallied 16% in the past two weeks (Tadawul: +6%) that followed the news related to the payment of 70% of the receivable arrears by the government, which would grow to 95%-100% within the following two weeks. Management has confirmed that it has seen an improvement in the receivable collection process over the past few weeks, albeit limited to the final collection stage (collection of pay orders from the Ministry of Finance). The challenge continues to be in the conversion of client and consultant already-approved bills to pay orders, which is where the bulk of the pending receivables are.
• The stock set to underperform the general index and peers We believe the stock will underperform its peers in the short to medium term, given its pure exposure to KSA, which makes it more vulnerable to the Kingdom’s budgetary constraints and slow receivables collection. It has secured negligible awards since mid-2015, which is expected to weigh down the company’s operating performance. Moreover, execution has been slow and collection/liquidity issues arose. Leverage ratios are high, despite recent slight improvement, but such improvement is unsustainable, in our view. Our FV is biased towards bear case scenario, given bearish view
• We introduce bull-bear scenarios to account for various operating market conditions. Our bull case (FV: SAR19.0) assumes a pick-up in contract awards, with the govt increasing its spending on an upward and sustainable reversion in oil prices, triggering increased awards, faster pace of project execution, higher projects’ profitability and faster receivable collection. Our bear case (FV: SAR7.50) assumes that bear market conditions would prevail. Our base case assumptions are more skewed to the bear case scenario, given our bearish view on the operating environment and the company’s performance.

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